Amazon - Is investor confidence bordering on faith?

Amazon remains an intriguing phenomenon for me.  Let's start with the concept of "it's always Day 1." When asked about Day 2, Mr. Jeff Bezos, clearly one of the most original thinkers in business says he does not ever want to see Day 2 because it is the start of the decline.  That is a bold statement and one that, I'm convinced, he believes in. But in startup terms, Day 1 is the zone of investment, Day 2 onward is when you make profit.  So if Day 2 is going to be postponed forever, then the corollary is that they will never make money.  So Amazon believers have to subscribe to the notion that they will never ever be able to validate the hypothesis that revenue growth eventually leads to profit.  In that situation, one has to admit the _possibility_ that the Day 1 story is just that - a story, a good narrative which distracts from the fact that there is no way to make money within the Amazon model.

A second aspect of the intrigue for me is the belief that Amazon will grow its footprint in one low-margin business after another, they will then deliver the best customer experience in the world (which they routinely do), add more cost by delivering to the customer's home rather than get them to come to a distribution center, and somehow grow the margin while doing all that - unless they are allowed to get to a monopoly status and then gouge on price, it seems unlikely that they can become more profitable than, say, a Walmart or a Target.

There are many other such intriguing aspects but the aspect that concerns me most is that any Amazon believer's answer to "how will it work out in the end?" is without exception a variant of "Jeff Bezos knows what he is doing?" That seems as close to a faith-based answer as one can get in a market economy.  To me that is the worrisome aspect - that a lot of smart people are willingly substituting Mr. Bezos' judgment for their own.  It is not even group think; it is a one-man think.  And I worry that even a man clearly as brilliant as Mr. Bezos cannot prevail in a war of ideas against the rest of the innovation economy.  

MSFT and INTC: Earnings News

1/21/2012
Last Thursday, MSFT and INTC both issues positive earnings surprises. No surprise that the stock prices for both Microsoft and Intel went up on Friday. MSFT is probably half-way through its run-up (which started just under $26 a couple of months ago); I believe INTC is just at the start of a secular upward move.

In my previous post, I left out the fact that I bought INTC Jan 13 Calls @30 at an average price of $0.72/share. I think they are still a good buy at Friday's closing price of $0.88.

I'm wondering whether to buy puts on Sears Holdings (SHLD) and on GOOG. Yes, yes .. I know ... one negative surprise from Google does not knock out a solid business model. But it looks like they might be at the start of a trend towards lower and lower margins. Which means, P/E has to come down. Let's say they can do slightly better than AAPL in the long-run, perhaps justifying a P/E of 17. That would give us an approximate price target of 17 x $30, or $510/share. Of course, this is far too simple an analysis to really go by. But it is scary that if Google were to be valued at the same discounted rate as AAPL, they'd be priced even lower, about $55/share lower.

So, final thought for the day - Google Jan 13 puts sound good?

Investing for 2012 and Beyond

I have been investing for several years and it's been an interesting ride so far. In particular, it seems to me that every two or three years, my thinking in terms of investing strategy "evolves." Perhaps all investors go through a similar phased evolution and there might even be a few popular trajectories of evolutions. Anyway, over the last few months it's occurred to me that if one were to broadly classify all stocks into two categories, dividend/income and growth, that perhaps the "best" trading strategies are different for each of them. For example, buy-hold-and-track might be best for the former whereas buy-track-and-sell might be best for the latter. Furthermore, I can't really see a good reason to buy a stock that does not yield a dividend. Buying or selling long term options seems like a much better strategy to me because it allows you to diversify more with the same amount of capital. Of course, options come with greater volatility and therefore greater risks than stocks. Still, I'm increasingly inclined to put a substantial fraction of my portfolio into dividend/income stocks and a smaller fraction into options to juice up the returns. BTW, I am sure that I'm not the first person to think in this way. When I recently told a friend of mine about this, he said that many years ago, he used to get a newsletter whose author had a very similar take (except he recommended cash instead of dividend/income stocks). Note also that when I say dividend/income stocks, I do not mean stocks with no growth potential at all. In fact, it is important to find stocks such as JNJ and AT&T that will grow dividends each year, thereby providing a sustained stock price with a strong yield.

I can't really end my first financial blog post without a few recommendations. So here's my take for now:

In the last 4 weeks, I've purchased CYH (Community Health Systems), AYR, and BOX.

As of 15 Jan 2012, I'm recommending the following buys:

MSFT Jan 13 Calls at a strike price of $30. I bought them at $1.45 about a week ago.

INTC Jan 13 Calls at a strike price of $30

The following two covered call investments also look appealing:

Buy UTHR and sell May'12 covered calls at $3.80

Buy STX and sell Mar'12 covered calls with a strike of $20 at $0.81/share or sell Jun'12 covered calls at a strike price of $22 ad $1.10/share

That's it for now.